There are one or two examples of financial independence pyramids floating around the web, but none of them really capture the way I’ve been thinking about financial independence. As my wife and I have gone on our journey, we’ve found that there are certain key milestones that, when you hit them, give you a massive psychological boost of confidence. It’s those milestones that I built a new Financial Independence Pyramid (not to be confused with pyramid schemes!) around.
Covering your basic needs.
At this most fundamental level, you’re able to earn enough money to cover your basic human needs. That means you’re earning enough to be able to pay for food, water, and a roof over your head… and not much else. But you know what? You’ve gotta start somewhere, and many people in the world struggle to even step onto the platform of this pyramid.
Having enough left over to save for a rainy day.
At this second tier of the pyramid, not only do you have enough money to cover your basic needs, but you also have enough to start to live a little, and even to be able to save some away from a rainy day. Believe it or not, many North Americans (including most Canadians, according to this post by Investment Executive) land squarely on this level of the financial independence pyramid.
It’s not that they don’t have the means to move beyond it; it’s that they choose not to. Extra dollars left over at the end of the month go toward lifestyle inflation, rather than savings, and it becomes difficult to break that cycle once it starts. If you can break that habit and actually sock some money away though, well… that’s when the magic really starts to happen.
Having enough saved for that rainy day that you’ll be ok if it happens.
If you’ve made it to this tier, you’re doing something very right, and it’s probably only a matter of time before you make it further up the pyramid. The one thing that separates those who reach the third level of the Financial Independence Pyramid from those who stay at the second is that they’ve made a choice. They have chosen to take their leftover funds and save them – or better yet, invest them – instead of spending them.
If you’re investing your leftover money at the end of each month, it’s only a matter of time before you’ve got enough accumulated that you can feel comfortable that you can handle a rainy day – maybe you lose your job, or you end up with an unexpected medical bill or home repair.
For me, this was the first tier where I really noticed a major change in my sense of well-being. Knowing we weren’t going to be absolutely wrecked if something unexpected happened was an incredible feeling, and something I hadn’t experienced for most of my adult life. It was only 5 years ago that my wife and I reached this point.
Having enough saved that you won’t eat into your savings if you’re laid off.
This fourth tier is literally on a completely different level than being able to withstand a rainy day. There’s a big psychological difference between “I have enough saved that I can withstand a storm” and “I have enough saved that I can withstand a storm with my nest egg completely intact.”
That second statement is what we’re talking about here.
At this level, you’ve got so much saved up that, with the help of Employment Insurance (if you’re in Canada), Social Security (if you’re in the states), or whatever local program you have (if you’re global), you’d be able to take your time and search for a great job, and not just any job, if you were to find yourself unemployed for some reason. Don’t underestimate the impact that not panicking can have in a successful job search. You’ll feel more confident, and come across that way in all your interviews, too.
Make no mistake; this is another major milestone, and one that my wife and I only just crossed the threshold of. This is our platform as of right now… but the next one is in view!
Having enough saved that you won’t eat in your savings if you quit your job.
In this penultimate platform on the pyramid, you’ve got even more saved up than before; so much so that you’re able to sustain yourself even without the help of government aid. Your significant other still needs to work in order to manage this, but it’s still a big step up from the previous tier.
Why?
Because it means that you never again have to tolerate a horrible boss. If your boss is a tyrant, you walk away. Thanks for playing. That’s it. And your nest egg will sustain you until you’re able to find a new, better opportunity with a new, better boss.
Having enough saved that you no longer need your job at all.
At last, we’ve reached the Holy Grail: true financial independence. At this level, your nest egg has grown so substantially that you and your significant other no longer need to work at all. You can both live exclusively off your nest egg’s earnings, without ever needing to dip into the principle.
An important note is that you haven’t reached this pinnacle until your nest egg can not only support your current lifestyle, but also any future health-related costs that might come up. It’s not just about supporting yourselves for today, but also well into the future.
I don’t even know what this tier feels like, because I’m not there yet. But I can imagine, and I imagine it feels pretty darn incredible. Again, as long as you keep doing the things that got you to all of the previous tiers, the only thing separating you from the summit is time. Give it time, and your nest egg will grow enough to get you there!
What’s Missing Here?
You’ll notice that I barely talked about lifestyle at all when talking through this thing with you. That’s on purpose. At the end of the day, financial independence doesn’t care about lifestyle; it cares about your ability to continue on living without relying on a paycheque.
And guess what?
That’s a lot easier to do when you don’t live an insanely lavish lifestyle. In fact, the more luxurious a lifestyle you lead, the longer you’re going to have to wait to be truly financially independent, because you just have that many more monthly expenses to cover.
Pro tip: being happy with less is one of the fastest, most surefire routes to financial independence.
Wrapping it Up
No matter where you are on the Financial Independence Pyramid, it’s never too late to change your situation. Remember, from the second level onward, it’s all about the choices you make; you can choose to move up the pyramid, or you can choose to pad your lifestyle. All I know is that the sleep-at-night factor that comes with making your way to that next tier of the pyramid is way, way worth whatever minimal sacrifice it took to get there.
